The Hindu Business Line : Banks may nudge corporate borrowers to get rated

Rating compulsions
Unrated loans carry higher risk weightage for banks.
The idea of lower rates on borrowings by AAA-rated cos yet to catch on
IBA may request RBI to extend deadline for compliance in this regard

Priya Nair

Mumbai, Jan. 9 Reluctance on the part of companies to get themselves rated is proving to be a burden for their banks. Banks which are gearing up to comply with the Basel–II norms find that many of their clients do not have any credit rating.

The idea that a high rating will enable borrowers to get loans at lower rates and that no rating will result in higher rates has not yet caught on among Indian companies.

Under the Basel norms, any corporate loan over Rs 50 crore, which is unrated, will carry a higher risk weight of 150 per cent, which means banks will have to provide more capital.

For instance, under Basel II, banks’ exposure on a corporate with ‘AAA’ rating will have a risk weight of only 20 per cent. This implies that for Rs 100 crore exposure on a ‘AAA’ rated corporate, the capital adequacy will be only Rs 1.8 crore (100 x 20% x 9%) compared to the earlier requirement of Rs 9 crore.

The banks will have to maintain a minimum 9 per cent CAR.

However, a corporate with below ‘BB- ’ rating will carry a risk weight of 150 percent and the capital requirement will be Rs 13.50 crore (100 x 150% x 9%).

Thus, a bank with a credit portfolio with superior rating may be able to save capital while banks having lower rated credit exposure will have to mobilise more capital.

In the past few days, many banks have announced separate arrangements with the rating agencies such as Crisil, CARE, ICRA and Fitch for rating their clients.

Onus on firms

According to a senior bank official, as ratings have to be solicited by companies and cannot be imposed by banks, it puts the onus on the company to get itself rated.

In fact, the Indian Banks’ Association is even thinking of requesting the Reserve Bank of India to extend the deadline for this particular clause of the Basel norms and taking up the issue with industry associations.

“Our market is not mature enough with regard to interest rates. Rates are more competition-driven and not risk-driven. So, even if one bank insists on a higher rate from an unrated company, that company can always approach another bank for lower rates,” said a senior official of a large public sector bank, which has to implement Basel II norms by March 2008.

The bank has now started asking its borrowers of over Rs 50 crore to get themselves rated and also included a similar clause while sanctioning loan applications.

“Eventually we hope that the fear of having to pay a higher interest rate will persuade corporates to get themselves rated. The discipline should come from them, rather than the banks having to impose it,” the official added.

Novel idea

For several companies the whole idea of rating is new and they feel that there is no direct benefit despite the effort, said Mr Rajesh Mokashi, Executive Director, CARE Ratings.

“This is the initial resistance to anything new, because corporates don’t know much about the modalities of ratings. But in the last one to two months, the flow of potential corporate clients who want to get rated has increased. We expect it to increase further as we approach March and continue into next year, as more banks implement Basel norms,” he said.

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